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Make Money Online with Residual Income: the Rule of 25
The Rule of 25
At its core, passive or residual income is money you earn from only doing the work once, and continue to earn without any extra effort. There are many ways to earn an income, what better way than only having to do the job once, and getting paid for it many times over?
The easiest, or most straightforward way to create passive income is with existing dollars. This concept is where retirement savings comes from. You earn and save enough, and hope your funds grow, so at some point you are able to live from a very small part of your savings and the returns.
Below is a simple explanation of the Rule of 25.
1. Determine the amount of income in today's dollars you wish to earn. For examples sake, we will choose $50,000. This number again is in today's dollars, so do not worry about inflation, this is addressed later.
2. Implement the rule of 25. take the $50,000 you want to earn each year and multiply it by 25. In our example this is $1,250,000. your goal is to earn at least a 7% return through the invested portfolio. This is the only variable in the equation. your portfolio will fluctuate, but by earning a minimum of 7%, rest assured you will have at least $50,000 a year to live off of.
3. To sustain your nest egg, and keep up with inflation, do not withdraw more than 4% each year. This is the second part of the rule of 25. Quick math proves 4% multiplied by your nest egg of $1,250,000 is your desired $50,000. The other 3% is reinvested for growth to keep up with inflation.
Any extra return is icing on the cake. 7% is by no means an unrealistic expectation. A conservative and well diversified portfolio should not have any problem achieving and sustaining 7% minimum.
This concept is at the base for the concept of retirement, passive income, and many other applications. there are many ways to reach this goal, but at its core, this is what passive income is meant to do, and this example is the easiest concept to grasp. Earn money, invest money, live off of the returns.
To take it just one step further, though there are many, lets create a simple word problem in an every day scenario. You are 30, and want to retire at 65. That gives you 35 years to build your nest egg, and 35 is a slightly late start. Now lets stick with our 7% return, and compound the interest monthly, how much do you think you would need to save each month to reach that magic $1,250,000? $1,000? $900? $800? NO! You would need to save and invest just under $700 a month to reach that goal. If you started at 25, it would take less than $500!
The old saying goes something like " the best time to plant a tree is 20 years ago, the second best time is today!"
Start early, be consistent, and you WILL reach your goal.
For more information on personal finance, visit my blog at http://www.stewardology.com/blog